A recent survey by McKinsey shows that 40 per cent of the chief financial officers of companies are of the opinion that marketing investments should not be protected in a downturn. Here’s a memo to CFOs who think this way. Others can read it too. It may reinforce your conviction that not only should marketing be protected in a downturn, but also that such a time offers an opportunity to expand.
Dear CFOs:
It’s important to understand two critical differences. The difference between a product and a brand, and the difference between sales and marketing. A product is the output of manufacturing. Anybody with the same technology can manufacture it. Versions of the same product manufactured by different producers will be intrinsically the same and not different from one another. Brands, on the other hand, are the differentiators that infuse life into the output of various producers. Brands are what consumers identify with, and not products.
Differentiating factor
Sales is not the only purpose of marketing, but is one among the many marketing processes. Sales drives revenues. It is an accepted economic reality that lower prices will always drive larger volumes, assuming all other things are equal. The other functions of marketing — packaging, advertising, and endorsements — are the stuff that ensures all other things are not equal by creating the differentiation that consumers can identify with.
As CFOs you will appreciate and acknowledge that driving sales through parity pricing is a recipe for selling at a loss, even when revenues are high. This is what happens when your product is undifferentiated from your competitors. Brands ensure that you do not have to sell at parity pricing, but market at a price that will comfortably yield a profit.
Brand is the only asset
One other thing about a brand is that a brand is the only asset of your company that the consumer identifies with. The consumer does not know or care about other assets that you own or have, but since they cherish the asset they identify with, they are willing to pay a higher price. Thus, even though the brand is your creation, it is an asset ‘owned’ by the consumer.
Not convinced? Well here is an example from real life. This chart shows the pricing comparison for Nike and Adidas.
The key points are:
a. The elements of commonality — manufacturing, logistics and margin are near identical to both brands and account for 77 per cent of the total cost of the shoe.
b. The key differences are in the marketing and overhead costs and the resulting profit for the brand.
c. Nike, which is consistent in its marketing spend through thick and thin, has lower advertising (10 per cent) and other opex (22 per cent) costs
d. Adidas, which has been somewhat erratic in its spend over time, actually has a higher marketing (16 per cent) and other opex (26 per cent) cost
e. The net result is that Nike not only walks away with more profits than Adidas (10 per cent vs 4 per cent), but is also two-and-half-times more profitable.
Counter-intuitive as it may seem, it is not at all so, when examined critically. Adidas ends up with higher spends over time, because it needs to catch up for lost time from when it downsized marketing investments. Nike, on the other hand, does not have any catch up to do because it has been consistent in its activities. The added bonus for Nike has been that while other brands were busy slashing investments, it was more visible because, relatively, its activity was higher than competition’s, making it king of the heap.
The other lesson that the marketing costs show is that consistency of messaging and how it is delivered are key ingredients in the making of a brand. This results in Nike having a market cap of $171 billion while Adidas languishes at a market cap of $60 billion.
Growth driver
One last thing. You would not have failed to notice that non-marketing costs are twice as high as marketing costs. Logically, therefore, every percentage point cut from non-marketing costs will save more cash during a downturn than the savings from cutting marketing costs. Not only will such cuts make your organisation leaner, they will also bring you an exponentially higher return when the downturn ends due to the greater consumer franchise you have built up.
It should be clear by now that marketing investments are the muscle that drives the profits of a business and not the fat that needs to be trimmed. One hopes that henceforth there will be less chatter from your offices about cutting marketing costs and more focus on finding savings from where they matter.
(The writer is the Director of Rage Communications, a digital marketing company.)